In today's post-crisis economy effective risk management is a critical component of any winning management strategy. Risk management is one of the nine knowledge areas propagated by the Project Management Institute (PMI). The PMBOK® Guide recognises nine knowledge areas typical of almost all projects. The 9 knowledge areas are:
- Project integration management.
- Project scope management.
- Project time management.
- Project cost management.
- Project quality management.
- Project human resource management.
- Project communications management.
- Project risk management.
- Project procurement management.
Although these knowledge areas are all equally important from a project manager's point of view, in practice a project manager might determine the key areas which will have the greatest impact on the outcome of the project. Each PMI knowledge area in itself contains some or all of the project management processes.
For example, project risk management includes:
- Risk management planning;
- Risk identification;;
- Qualitative risk analysis;;
- Quantitative risk analysis;;
- Risk response planning;;
- Risk monitoring and control.;
Risk management is probably the most difficult aspect of project management. A project manager must be able to recognize and identify the root causes of risks and to trace these causes through the project to their consequences. Furthermore, risk management in the construction project management context is a comprehensive and systematic way of identifying, analyzing and responding to risks to achieve the project objectives[5,6]. The use of risk management from the early stages of a project, where major decisions such as choice of alignment and selection of construction methods can be influenced, is essential. The benefits of the risk management process include identifying and analyzing risks, and improvement of construction project management processes and effective use of resources.
The construction industry is heterogeneous and enormously complex. There are several major classifications of construction that differ markedly from one another: housing, non-residential building, heavy, highway, utility, and industrial. Construction projects include new construction, renovation, and demolition for both residential and non-residential projects, as well as public works projects, such as streets, roads, highways, utility plants, bridges, tunnels, and overpasses. The success parameters for any project are in time completion, within specific budget and requisite performance (technical requirement).
The main barriers for their achievement are the changes in the project environment. The problem multiplies with the size of the project as uncertainties in project outcome increase with size[17,18]. Large construction projects are exposed to uncertain environment because of such factors as planning, design and construction complexity, presence of various interest groups (owner, consultants, contractors, suppliers, etc.), resources (manpower, materials, equipment, and funds) availability, environmental factors, the economic and political environment and statutory regulations.
Construction projects can be unpredictable. Managing risks in construction projects has been recognized as a very important process in order to achieve project objectives in terms of time, cost, quality, safety and environmental sustainability. Project risk management is an iterative process: the process is beneficial when is implemented in a systematic manner throughout the lifecycle of a construction project, from the planning stage to completion.
In the European Union construction is the sector most at risk of accidents, with more than 1,300 people being killed in construction accidents every year. Worldwide, construction workers are three times more likely to be killed and twice as likely to be injured as workers in other occupations. The costs of these accidents are immense to the individual, to the employer and to society. They can amount to an appreciable proportion of the contract price.
Construction activities in Lithuania provided employment to an estimated 93.7 thousand persons in 2011, while an annual turnover in excess of EUR 1.91 billion. Construction is one of Lithuania's largest industries. Unfortunately it has also the occupational health and safety problems. More construction workers are killed, injured or suffer ill-health than in any other industry. In 2011, 13 construction workers killed whilst at work, compared to 7 industrial workers and 4 agricultural workers. In comparison with 2010, the number of fatal accidents in construction enterprises increased by more than 2 times, i.e. from 6 to 13 cases has been reported.
The risk analysis and management techniques have been described in detail by many authors[23,27]. A typical risk management process includes the following key steps:
- Risk identification;
- Risk assessment;
- Risk mitigation;
- Risk monitoring.
Risk identification is the first and perhaps the most important step in the risk management process, as it attempts to identify the source and type of risks. It includes the recognition of potential risk event conditions in the construction project and the clarification of risk responsibilities. Risk identification develops the basis for the next steps: analysis and control of risk management. Corrects risk identification ensures risk management effectiveness. Carbone and Tippett stated that the identification and mitigation of project risks are crucial steps in managing successful projects.
The PMBOK® Guide defines a project risk as "an uncertain event or condition that, if it occurs, has a positive or negative effect on at least one project objective". There are many possible risks which could lead to the failure of the construction project, and through the project, it is very important what risk factors are acting simultaneously. As stated by Raz et al., too many project risks as undesirable events may cause construction project delays, excessive spending, unsatisfactory project results or even total failure.
Many approaches on risk classification have been suggested in the literature for effective construction project risk management. Tah and Carr categorized risks into two groups in accordance with the nature of the risks, i.e. external and internal risks. Combining the fuzzy logic and a work breakdown structure, the authors grouped risks into 6 subsets: local, global, economic, physical, political and technological change. According to Wang et al., the classification of the risks depends mainly upon whether the project is local or international. The internal risks are relevant to all projects irrespective of whether they are local or international. International projects tend to be subjected to the external risk such as unawareness of the social conditions, economic and political scenarios, unknown and new procedural formalities, regulatory framework and governing authority, etc.
According the PMBOK® Guide, the risks are categorized into such groups: technical, external, organizational, environmental, or project management. Some categories of risk that affect a construction project are similar to risks in other types of project, whether in a financial investment in common stocks or government bonds. some are specific to construction. The risk identification process would have highlighted risks that may be considered by project management to be more significant and selected for further analysis.
Risk identification is an iterative process because new risks may become known as the project progresses through its life cycle while previously-identified risks may drop out. Construction projects carry complex risks for all involved including owners, consultants, contractors, and suppliers that can increase when construction takes place near an active facility or congested area. Risks include geological or pollution-related conditions, interference with ongoing operations, construction accidents, as well as design and construction faults that may negatively impact the project both during construction and when the project is completed.
Generally, two broad categories, namely qualitative and quantitative analysis, are distinguished in literature on risk assessment. A qualitative analysis allows the key risk factors to be identified. Risk factors may be identified through a data-driven (quantitative) methodology or qualitative process such as interviews, brainstorming, and checklists. It is considered as an evaluation process, which involves description of each risk and its impacts or the subjective labelling of risk (high/medium/low) in terms of both risk impact and probability of its occurrence. Qualitative risk analysis assesses the impact and likelihood of the identified risks and develops prioritized lists of the risks for further analysis or direct mitigation.
Carr and Tah introduced a hierarchical risk breakdown structure (HRBS), which represents a formal model for qualitative risk assessment. Quantitative analysis involves more sophisticated techniques and methods to investigate and analyze construction project risks. Quantitative risk analysis attempts to estimate the frequency of risks and the magnitude of their consequences by different methods such as decision tree analysis, cost risk analysis, and Monte Carlo simulation. The application of the quantitative risk analysis allows for the construction project exposure to be modelled, and quantifies the probability of occurrence of the identified risk factors as well as their potential impact.
Various risk management tools are available, but unfortunately, they are not suitable for many industries, organizations and projects. Although today's organizations appreciate the benefits of managing risks in construction projects, formal risk analysis and management techniques are rarely used due to lack of knowledge and to doubts on the suitability of these techniques for construction projects.
There are four alternative strategies for treating risks in a construction project risk avoidance, risk transfer, risk mitigation, and risk acceptance. As stated by Hillson, risk mitigation and risk response development is often the weakest part of the risk management process. The proper management of risks requires that they be identified and allocated in a well-defined manner. This can only be achieved if contracting parties comprehend their share of risk responsibilities, risk event conditions, and risk handling capabilities.
Before the crisis (2004-2008), due to a lack of contractors' responsibilities and control in various steps of a project's development, the time and quality performance levels of construction projects in the Lithuania were generally inadequate or even poor. In construction projects, many parties are involved such as owner, consultant, contractor, sub- contractor, and supplier. Each party has its own risks. Risk transfer means the shift of risk responsibility to another party either by insurance or by contract. Wang and Chou reported that contractors usually use three methods to transfer risk in construction projects:
- through insurance to insurance companies;
- through subcontracting to subcontractors;
- through modifying the contract terms and conditions to client or other parties.
Construction projects can be managed using various risk management tools and techniques. Ahmed et al. reviewed techniques that can be used for development of risk management tools for engineering projects. Techniques for context establishment, risk identification, risk assessment and treatment were provided. Application of risk management tools depends on the nature of the project, organization's policy, project management strategy, risk attitude of the project team members, and availability of the resources. A risk assessor model (RAM) presented by Jannadi and Almishari was developed to determine risk scores for various construction activities. The model provides an acceptability level for the risks and determines a quantitative justification for the proposed remedy.
Risks and uncertainties, involved in construction projects, cause cost overrun, schedule delay and lack of quality during the progression of the projects and at their end[28,29,42]. As stated by Baloi and Price, poor cost performance of construction projects seems to be the norm rather than the exception, and both clients and contractors suffer significant financial losses due to cost overruns.
Oyegoke et al. discusses the problems of managing risk and uncertainty in construction project due to the owner dissatisfaction in project outcome and dynamism within agile construction environment. The authors identified some areas in supply chain processes which are prone to greater risks and uncertainty and propose an agile management principle based on the concept of integration and fragmentation in product development and execution processes respectively.
Many authors have reviewed problems on time performance in construction projects[43,45,46]. Aibinu and Odenyinka investigated and assessed the causes of delays in building projects in Nigeria.
Nine factor categories evaluated include:
- quantity surveyor-,
- structural engineer-,
- services engineer-,
- subcontractor-caused delays-, and
- external factors (i.e. delays not caused by the project participants)-.
Finally, 10 overall delay factors were identified, namely:
- contractors' financial difficulties-,
- client' cash flow problems-,
- architects' incomplete drawings-,
- subcontractors' slow mobilization-,
- equipment break-down and maintenance problems-,
- suppliers late delivery of ordered materials-,
- incomplete structural drawings-,
- contractors' planning and scheduling problems-,
- price escalation-, and
- subcontractors' financial difficulties-.
The various authors pointed out poor risk management as one of the principal delay factors and concluded that actions and inactions of construction project participants contribute to overall project delays.
According to Baloi and Price, the construction contractors highlight that delay in payments is common both in private and public projects, with the public sector being the worse defaulter. Moreover, most types of contracts presume compensation clauses for delay in payments, but clients rarely agree to pay the interests due to the contract. Nasir et al. analysed schedule risks and developed a comprehensive construction schedule risk model is referred to as Evaluating Risk in Construction‑Schedule Model (ERIC‑S). The ERIC‑S model provides decision support to project owners, consultants, and researchers as a project delay prediction tool. Similarly, the Cost-Time-Risk diagram (CTR) proposed by Aramvareekul and Seider helps project managers consider project risk issues while monitoring and controlling their project schedule and cost performance in one diagram.
The performance by the project management team highly influences the success of a construction project. Some of the incidental risks associated with poor project management performance are:
- Unclear or unattainable project objectives;
- Poor scoping;
- Poor estimation;
- Budget based on incomplete data;
- Contractual problems;
- Insurance problems;
- Quality concerns;
- Insufficient time for testing.
Many authors have recognized the value of trust within the project business. Lewicki and Bunker emphasize that trust is a critical success element to most business, professional, and employment relationships. Trust is argued to improve the inter-organizational relationships among principal actors in project development, such as owners, contractors, and suppliers. According by Krane et al. trust between project owners and project managers is crucial for project success.
In business relations, as stated by Kaklauskas et al., the global economic crisis brought about distrust of other stakeholders. Trust reinforces the relationships of the critical stakeholder that often determine the success of a project[51,54,55]. Ward and Chapman concluded that stakeholders are a major source of uncertainty in construction projects. Smyth et al. note that trust provides an important resource for creating greater probability and certainty. Wilkinson found that project management companies need to overcome problems in their relationships with other professionals on the project team and with the client. For the success of construction projects, there is a need for alignment of the project owners' interests and the project management team's interests and trust between them.
Construction projects are tendered and executed under different contract systems and payment methods. According by Zaghloul and Hartman, there is no possibility to eliminate all the risks associated with a specific project. All that can be done is to regulate the risk allocated to different parties and then to properly manage the risk. Chapman and Ward argue that the contract choice decisions are central to both stakeholder management and the management of risk and uncertainty. The authors proposed an integrated approach based on a balanced incentive and risk sharing (BIARS) approach to contracting as well as a best practice approach to risk management in terms of the whole project life cycle.
Contractors generally aim to make an acceptable range of profit margin. Profit margins in the industry have been low for most contractors on projects in recent years. Correct understanding and allocation of risk helps for contractors to avoid erosion of the profit margin. Ökmen and Öztas proposed a new simulation-based model the correlated cost risk analysis model (CCRAM) to analyse the construction costs under uncertainty when the costs and risk-factors are correlated. The CCRAM model captures the correlation between the costs and risk-factors indirectly and qualitatively.
Baloi and Price determined the most critical risk factors affecting construction cost performance. The authors stated that global risk factors pose more challenges to contractors, who are less familiar with them. The authors introduced a fuzzy decision framework for a systematic modeling, analysis and management of global risk factors affecting construction cost performance from contractor's perspective and at a project level. Similarly, Ismail et al. provide a "Level-Severity-Probability" approach to determine the critical risk source and factors. Fuzzy logic is used in the proposed methodology for evaluation of the risk level, severity and probability. As stated by Zeng et al., the application of fuzzy reasoning techniques provides an effective tool to handle the uncertainties and subjectivities arising in the construction project.
The review of the literature revealed a wide range of risk types and sources in construction projects, and that various risk management methods and techniques can be employed in the management of construction projects in order to control potential risks.